Testing for the Fisher hypothesis under regime shifts: an application to Asian countries

Abstract

Previous empirical studies on the Fisher hypothesis have focused on developed countries, thus leaving developing countries with no or very few studies. This paper tests the validity of the hypothesis for six Asian countries over the period 1978–2005 using a cointegration procedure developed by Gregory and Hansen (1996) that allows for the presence of a one-time endogenously determined structural break in the cointegrating vector. The results indicate evidence in favor of the Fisher hypothesis for only Korea and Singapore after allowing for a regime shift and for Malaysia and Thailand with no evidence of regime shift. The results indicate the presence of the full Fisher effect for Korea and the partial effect for Malaysia, Singapore, and Thailand.